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Monetary and fiscal policies during the great recession
Monetary and fiscal policies during the great recession
Monetary and fiscal policies during the great recession
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The impact of the Global Financial Crisis on inflation After the onset of the global economic recession in 2008, inflationary pressures were relieved. Slower economic growth and incomes growth lessened the ability of businesses to increase consumer prices, while also decreasing demand for labour and materials trimmed down inflationary pressures on business costs. By 2009, both headline and underlying inflation fell to the lower end of the Reserve Bank’s inflation target band between 2-3% where the Treasury forecasted inflation (CPI) to be 1.5% in 2008-09. Economic Recovery package- use of macroeconomic policies Fiscal policy Fiscal policy has played an important role in sustaining low inflationary pressures. In response to the Government’s excessive spending in the 2008-09 Budget deficit, the Government had also augmented the size of the forecast Budget surplus to $1.0bn in 2012/13, a $16.9 bn improvement from that forecast in the mid year economic fiscal outlook with the objective of maintaining low inflation in the economy as public demand decreases. However in 2009-10, the Government’s Budget strategy was altered, with the Government increasing spending to stimulate the economy and inflation being a much lower priority. Monetary Policy With the world economy expected to contract in 2009, the first time in six decades, concerns of the impact of the downturn had overtaken concerns for the rise of inflationary pressures. In a short time space of 9 months, the cash rate fell to 3%, lowered by 4.25 percentage points as the Reserve Bank had implemented expansionary monetary policy. However, now with economic conditions within Australia stronger than expected and measures of confidence recovered, the Reserve Bank has shifted policy settings to contractionary, involving domestic
A balanced stance on fiscal policy was targeted by the Government in response to the global recession between short and long-term policies. These measures involved bonus payments to low and middle-income Australians to insta...
Clark, Todd and Christian Garciga. "Recent Inflation Trends." Economic Trends (07482922), 14 Jan. 2016, pp. 5-11. EBSCOhost, cco.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=112325646&site=ehost-live.
Fiscal policy uses changes in taxes and government spending to affect overall spending and stabilize the economy. When lowering taxes the people have more to spend then the government decreases spending and the economy slows down therefore the economy stabilizes. The objective of fiscal policy is the governments’ typical use fiscal policy to promote strong and sustainable growth and reduce poverty. During periods of recession congress has the option to decrease taxes to give households more disposable income so they can buy more products. Therefore, lowering tax rates increases GDP.
“The goal is an equilibrium level of national income that generates full employment with price stability”. (Amacher & Rate, 2012 pg. 9.2) During a recession, the government can use an expansionary fiscal policy to fill the recessionary gap, influencing the aggregate curve to the right. A recessionary gap happens when the economy is operating under full unemployment. When the economy is going through a recession; net exports, individual incomes, and investments will decrease affecting our GDP. President Barack Obama used an expansionary fiscal policy by enacting the Economics Stimulus Act during the Great Recession. If the government wants the opposite effect, it would implement a contractionary monetary policy, which slows down the economy. An economy is slowed down by reducing the money supply. The Federal Reserve contracts the money supply by selling bonds through market operations, meaning the public market. When bonds are sold, interest is collected by the central bank which has an effect on the price of goods and services (Inflation). The Federal Reserve can also affect the money supply by adjusting interest rates which will affect borrowing, consumption, and investments. If the Federal Reserve wants to expand the money supply it will purchase government bonds. This will cause interest rates to fall resulting in an increase in investments and borrowing
As the global economy struggles along, the recent decrease of value of the United States dollar also puts pressure on the United States to increase its inflation rate to the target 2%. There can be multiple ways of doing this, all which stem from the LM-IS curve. If one was to assume that the IS curve was elastic, a fiscal policy might be the solution to raise interest rates. If government were to cut back on taxes, or increase government spending, it would shift the IS curve to the right. This shift would create a new equilibrium point with the LM curve. This new point will have naturally increasing interest rates, which will help inflation, rise to the target point. It is up to government to decide on which fiscal policy would be most effective. However, if we cut taxes on consumers, one can expect that consumption would increase among consumers, and overall GDP would increase. Again, the Federal Reserve is looking to control the growth of the economy by raising Fed rates, so once can expect that once that natural inflation rate would need to increase before action is
"Will It Hurt? Macroeconomics Effects of Fiscal Consolidation." International Monetary Fund. N.p., n.d. Web. 10 May 2014. .
When the country’s economy is performing poorly; for instance, when there is high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year, the fiscal and monetary policy can be used to adjust these numbers to somewhat acceptable limits. In such a scenario, an expansion in fiscal policy would suffice to correct unemployment and low GDP by encouraging gove...
Australia has had one of the most outstanding economies of the world in recent years - competitive, open and vibrant. The nation’s high economic performance stems from effective economic management and ongoing structural reform. Australia has a competitive and dynamic private sector and a skilled, flexible workforce. It also has a comprehensive economic policy framework in place. The economy is globally competitive and remains an attractive destination for investment. Australia has a sound, stable and modern institutional structure that provides certainty to businesses. For long time, Australia is a stable democratic country with strong growth, low inflation and low interest rate.(Ning)
Comprehensively, there are two sorts of monetary environment strategy, expansionary and contractionary. Expansionary fiscal strategy expands the cash supply keeping in mind the end goal to lower unemployment, support private-division acquiring and buyer spending, and
This essay will seek to examine and critically analyse the consequences of deflation on a macroeconomic level. Economic theory will be drawn from to aid comprehension of deflation and its effect on the economy. Articles from Financial times will be used as case studies to better understand the practical effects of deflation. The implications and effect these have on an economy will be explored, particularly focusing on governments and business deal with deflation.
To answer the question of how monetary and fiscal policy can be used to influence the level of economic activities and whether or not the coordination of such policies is crucial for a Government is to achieve its macroeconomic policy objectives, let’s discuss the objectives of fiscal and monetary policy
The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In October 2008, the collapse of the major financial institutions and the crash of stock markets marked the peak of this global economic slowdown (Euromonitor International, 2008).
Different countries often see the same scenario in their economic forecast but how they handle the situation and the outcome can differ greatly. The economic issue that is going to be discussed in this work is deflation. Two countries that offer an interesting discussion are The United States and Japan. These two countries were experiencing a deflationary period at roughly the same time but had rather different outcomes. Each countries actions and policy implementations resulted each a different conclusion.
The debate of the relationship between inflation and unemployment is mainly based on the famous “Phillips Curve”. This curve was first discovered by a New Zealand born economist called Allan William Phillips. In 1958, A. W. Phillips published an article “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861-1957”, in which he showed a negative correlation between inflation and unemployment (Phillips 1958). As shown in figure 1, when unemployment rate is low, the inflation rate tends to be high, and when unemployment is high, the inflation rate tends to be low, even to be negative.
Recent U. S. experience with low, stable levels of inflation, in the range. of 2 to 3 percent, has spurred policy makers to consider. the possibility of achieving zero percent inflation. Reducing inflation however has costs in lost output and unemployment during the adjustment period.... ...